The Hong Kong government extended its own yield curve on Friday after pricing the institutional tranches of its landmark Hong Kong and US dollar denominated bond deal. Both the five and 15-year Hong Kong dollar tranches came at the tight end of pricing having attracted comfortable levels of oversubscription.
Lead managers were BOCI, Citigroup, HSBC and Merrill Lynch.
Having set out with a minimum size of HK$3 billion for the five-year tranche, the government increased it to HK$3.5 billion after attracting an order book of HK$6.2 billion. The deal was priced at 99.851% on a coupon of 3.75% to yield 3.783%.
This equated to 20bp over Exchange Fund Notes (EFN's) and 10bp through mid swaps. The deal had been marketed at 5bp to 10bp through swaps.
The 15-year tranche had a minimum size of HK$1 billion and was also increased to HK$1.5 billion after attracting an order book of HK$3.6 billion. Pricing came at 99.143% on a coupon of 5.125% to yield 5.208%.
This equated to 10bp over mid-swaps. The deal was marketed at 10bp to 15bp over.
Some 33 accounts participated in the five-year deal and 17 in the 15-year. About 40% are also said to have participated in the $1.25 billion 10-year dollar deal priced on Thursday.
By investor type, the five-year tranche saw a split of 71% banks, 18% central banks, 7% asset managers and 3% retail. Unsurprisingly the 15-year tranche had much greater participation from insurance companies, which took 32%, while asset managers came in for 21%, banks 19% and central banks 8%.
Prior to pricing, some non syndicate bankers had wondered how popular the 15-year tranche would be since most of the Territory's insurance companies price their policies in US dollars and consequently seek US dollar cover. However, specialists say there is always a Hong Kong dollar cash element in most insurance companies policies and portfolios.
The 15-year tranche also provided a valuable new benchmark for the market since the government has never issued EFN's beyond 10-years and has done very little at this level as well. But it did mean pricing points were few and far between.
The main reference point was the swap market, although specialists stress it is highly illiquid at this maturity. The leads were also conscious that many investors would reference 15-year tranche against the 10-year US dollar tranche and needed to make sure it was relatively attractive by comparison.
The US dollar tranche was priced to yield 5.208% equating to about 25bp over Libor. On an absolute yield basis of 5.224%, the 15-year tranche is very similar. On a Libor basis, however, it is very attractive and comes out roughly 1bp through Libor.
However, while many DCM bankers could understand the rationale for a long dated benchmark, few could see the point of a five-year deal, which was effectively priced at a premium to itself.
This was necessary because only EFN's are eligible for the Monetary Authority's discount window. The new sovereign bond will also not have the committed liquidity of the registered market makers in the "normal" government bond market.
Yet, the institutional deal did widen the investor base for Hong Kong dollar denominated paper. Typically, most local deals are placed almost exclusively in the Territory. In this instance, 17% of the five-year tranche was placed outside of Hong Kong and 15% of the 15-year.
More detailed breakdowns show that the five-year saw a further 12% placed in China and the remainder in Macau, Singapore, Taiwan, Europe and offshore US. With the 15-year 7% went to China and the remaining 8% went to Macau, Singapore, Switzerland, the UK and offshore US.
Pricing on the five-year also augers well for the sovereign's two retail tranches, which are scheduled to price on Wednesday. At 20bp over EFN's, the five-year has priced flat to the indicative level of the four-year retail tranche.
The sovereign is also marketing a two-year tranche at 9bp over EFN's. Coupons on both tranches have already been set at 2.13% and 3.38%.
Books had been scheduled to close on Friday, but will now be left open for one more day because of the typhoon.
